Spain Back on the Bond Trail

By David Roman

Bloomberg

Spain is back on the bond trail, offering potentially interesting wares for adventurous fixed-income investors.

This may a good time–possibly even the best of times–given recent improvements in appetite for Southern European paper. Still, the plan to sell several billion worth of bonds to cover Spain’s so-called “power tariff deficit” may still be a significant gauge of shifting perceptions about Spain’s sovereign and corporate risk.

Spain’s market regulator is expected to give the green light to the tariff deficit bond by the end of this week. The bond will be issued by Spain’s government on behalf of the country’s power utilities, which are owed as much as €15 billion-€20 billion in unpaid electricity bills.

Details on the issue, including the final amount to be raised — some analysts think only some €3 billion will be sought this time around — in how many tranches and when, should be forthcoming as the Finance ministry will start a road show as soon as the regulator approves the move.

Speed is of the essence. The currently quiet state of global markets and the light calendar for euro-denominated sovereign issuance expected through December make for a favorable environment now, says Giada Giani, a Citigroup economist.

As it is, she adds, yields for Spanish debt are probably as low as they’re going to get for some time — the spread between the Spanish government 10-year bond and the German equivalent was last at 160 basis points, down from 182 basis points a month ago and over 200 basis points over the summer. Recent bond issues by the central government and the Catalonian government have found solid demand.

“Maybe the government is expecting the situation not to improve significantly in 2011,” Giani says. “The cost of funding for Spain is unlikely to decline significantly in any meaningful way going forward.”

All the same, investors will likely ask for juicy yields for the risk they take. The big tariff deficit hole only exists because succesive Spanish governments, and most notably the current government, have promoted large increases in energy generation through expensive renewable sources like wind and solar power, but have declined to charge voters with the whole price of the move through domestic and corporate electricity bills.

This makes some twisted sense — even as it is, the actual hikes in power prices in Spain during the go-go years of green power have been a strong contribution to the country’s loss of competitiveness through soaring output costs. A recognition of the actual cost of renewable power would have made things even worse.

The Spanish utilities have already included the tariff deficit price surcharge in their earnings statements, and now are waiting for the government to actually raise the cash for them.

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